Understanding the effects of the value chain and how to optimize results from operations is vital to small business success. The value chain is a concept developed by recognized business management expert Michael Porter in his 1985 book "Competitive Advantage." It breaks up the various elements of producing and delivery value to customers into key components.

Value Chain Basics

Before considering results of an effective value chain, you need to understand its elements. The development of value for the customer begins with inbound logistics. Subsequent components include operations, outbound logistics, marketing and sales and service. The culmination of optimizing performance in each of these key elements is the establishment of product margin, which is the difference between what the market will pay for a product and the cost basis for the provider. Porter identified firm infrastructure, human resources management, technology development and procurement as key support elements of the value chain.

Optimized Margins

As noted, the net result of the value chain is the creation of margin potential. Optimized gross margin is significant to a small business with natural limits on how much volume it can generate. Higher gross margins means you can generate substantial profits from fewer sales than you could if any phase of the value chain was not optimized. The more value the customer sees and experiences from the purchase, the more he is willing to pay.

Cost Advantages

Along with enhancing margins, an effective value chain enables small businesses to reduce costs for production or resale. This is vital for smaller companies that do not always have the buying power of larger corporations. Companies can lower costs by optimizing logistics to reduce transportation expenses and to avoid wasted resources. They can also discover operational inefficiencies to speed up business processes and to cut down unproductive expenditures.

Long-Term Viability

Optimizing the value chain also helps companies differentiate themselves from competitors in terms of product features and benefits and branding. Product development means building solutions that are distinct and better than those offered by competitors. Branding is use of the marketing and sales component of the value chain to convey an image of quality, high service or other pertinent messages of value to the marketplace. Strong differentiation is important to current sales and long-term viability in a competitive market.

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About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.